Macy's, J.C. Penny fight for partnership with iconic brand

Macy's CEO Terry Lundgren testified on Monday that he hung up on home diva Martha Stewart after she called to tell him that the company that bears her name had inked a deal with J.C. Penney to open shops within most of the chain's stores.

Lundgren, whose company had been the exclusive carrier of some Martha Stewart's branded products, hasn't spoken to her since that phone call on Dec. 6, 2011 - even though he used to be good friends with Stewart.

"I was sick to my stomach," Lundgren testified on Monday in New York Supreme Court. "I can't remember hanging up on anyone in my life."

The testimony comes as Macy's Inc. and J.C. Penney Co. duke it out in court over the partnership with Martha Stewart Living Omnimedia. The trial, which began Wednesday, focuses on whether Macy's has the exclusive right to sell some of Martha Stewart branded products such as cookware, bedding and bath items. Other witnesses that are expected to take the stand in coming days include Penney's CEO Ron Johnson and Martha Stewart, who founded Martha Stewart Living.

Martha Stewart's brand, which has been at Macy's stores since 2007, has been important to the department store chain. Under Lundgren's leadership, Macy's has focused on building exclusive brands like Martha Stewart that are not carried by rivals to get shoppers to the store.

In the home area, exclusivity is key. Lundgren testified on Monday that Macy's had built the Martha Stewart brand to be the biggest in its home business. Sales last year were up 8 percent, double the rate for the entire company.

Lundgren said Macy's has spent 40 percent of its overall marketing on the Martha Stewart brand and other labels in the home area, even though the home category represents 17 percent of total sales. That's because even though the home area is typically slow turning, it drives shoppers to the store.

"I need the Martha Stewart business to be exclusive," Lundgren said. "I don't have a substitute."

His testimony is a culmination of a legal battle between the three companies that started shortly after the Penney-Martha Stewart deal was announced in December 2011.

Macy's sued Martha Stewart Living in January 2012, saying the company breached a long-standing contract when it penned the deal with Penney, which invested $38.5 million in a nearly 17 percent stake. In a separate lawsuit, Macy's sued Penney claiming it had no regard for the Macy's contract and that Johnson had set out to steal the business that it had worked hard to develop.

The two suits were consolidated for the bench trial. Supreme State Court Judge Jeffrey Oing is presiding over the trial, which is expected to last three weeks.

At issue seems to be a loophole in the agreement between Macy's and Martha Stewart. It's a provision that allows Martha Stewart to sell goods in categories like bedding in Martha Stewart Living's own stores.

According to Martha Stewart, because the Macy's agreement doesn't say the goods under dispute can be sold "only in "stand-alone" stores, the mini shops within J.C. Penney stores do not fall under the exclusive agreement.

Macy's Inc., based in Cincinnati, disagrees. Lundgren argues that a typical definition of a store is that it has a parking lot or is part of a mall. Furthermore, Macy's lawyers outlined in documents that Penney "knowingly and purposely demanded and received confidential information" from Martha Stewart Living about the contract with Macy's and crafted a deal that was more lucrative.

Macy's claims substantial damages and said the maneuver by Penney "threatens to inflict incalculable further harm on Macy's." The company claims that "billions of dollars of sales are involved."

But according to a memo filed by Penney, Macy's rights to Martha Stewart aren't nearly as sweeping as it suggests. Under Macy's interpretation of the contract, Martha Stewart Living is "little more than an in-house designer for Macy's," according to Penney.

And in court documents, Martha Stewart Living said it will prove that it was Macy's that breached the contract because it didn't "use commercially reasonable efforts to maximize net sales of Martha Stewart Collection products."

Last summer, Macy's won a preliminary injunction against Martha Stewart Living that would prevent it from selling housewares and other exclusive products at Penney. Judge Oing granted Penney permission to open Martha Stewart shops, as long as the items under the exclusive contract with Macy's are not sold in them.

Penney plans to open shops featuring designs from Martha Stewart on May 1, but spokeswoman Daphne Avila said that the some products, including bedding, have been stripped of the home maven's moniker and instead feature the label "JCP Everyday." Window treatments and paper products like stationery, which are not included in the exclusive arrangement with Macy's, will bear Martha Stewart's name.

But Macy's is trying to stop Martha Stewart from providing designs to J.C. Penney - whether or not it gets rid of the Martha Stewart moniker on the products it sells.

The stakes are high for both retailers as well as for Martha Stewart. For Macy's, having another major department store sell Martha Stewart towels, pots and other merchandise could dilute its business. And Penney has struggled with mounting losses and sharp sales declines since early last year after shoppers were turned off by a new strategy that eliminated most sales in favor of lower prices every day.

For its part, Martha Stewart Living is trying to fatten merchandising revenue as it struggles to offset declines in its broadcast and publishing business, a segment that accounts for more than 60 percent of its total business.

The stakes also are high for the personalities involved in the suit. Lundgren said that he hasn't spoken with the lifestyle guru since 2011.

"I was completely shocked and blown away," he testified on Monday. "It was so far from anything I could imagine."